An amount of money you can obtain quickly in case of immediate need. it nomally equal to three to nine months' living expenses

Term

A line of credit

Definition

a short-term loan that is approved before you actually need the money.

Term

Speculative investment

Definition

A high-risk investment made in the hope of earning a relatively large profit in a short term. eg: speculative stocks, certain bonds, some mutual funds, some real estate, commodities, options, precious metals, precious stones, and collectible.

Term

Rate of return

Definition

The total income you receive on an investment over a specific period of time divided by the original amount invested.

Term

five risk factors for the investment

Definition

inflation risk - a rise in the general level of prices

interest rate risk- associated with government or corporate bonds or preferred stock

business failure risk - associated with investments in stock, corporate bonds, and mutual funds that invest in stocks.

market risk - because of the behavior of investors in marketplaces, or maybe political or social conditions

global investment risk

Term

Approximate market value

Definition

Dollar amount of annual interest / Comparable interest rate

Dollar amount of annual interest = face value x interest rate

Term

Growth

Definition

growth means their investments will increase in value. Often the greatest opportunity for growth is an investment in common stock.

Term

Liquidity

Definition

the ability to buy or sell an investment quickly without substantially affecting the investment's value. Investments range from near-cash investments to frozen investments from which it is impossible to get your money.

Term

Asset allocation

Definition

the process of spreading your assets among several different types of investments (sometimes referred to as asset classes) to lessen risk

Term

William Bernstein said you should have beaten over 90% of all professional moey mangers and with considerably less risk over a 10 to 20 year period if your investment portfolio in

a calculation that includes not only the yearly dollar amount of income but also any increase or deccrease in the original purchase price of the investment.

Total return = current return + capital gain

Term

price/earnings - to - growth (PEG) ratio

Definition

PEG ratio = price-earnings ratio / annual EPS growth

a PEG value less than 1 implies that a stock may be undervalued based on its projected growth rate.

Term

Annualized holding period yield

Definition

Annualized holding period yield

= Total return 1

Original investment x N

N = Number of years investment is held

an increase in annualized holding period yield is a healthy sign

Term

Beta

Definition

A measure that compares the volatility associated with a specific stock issue with the volatility of the standard & Poor's 500 stock index.

The beta for the S&P 500 is 1.0. The majority of stocks have betas b/c 0.5 and 2.0. conservative stocks have low betas and speculative stocks have high betas.

Term

Book value

Definition

Book value = assets - liabilities

Shares outstanding

Term

Market-to-book ratio

Definition

Market-to-book ratio = Market value per share($mkt)

Book value per share

A low market-to-book ratio could mean that the stock is undervalued, and a high could mean that a sotck is overvalued.

Term

Fundamental analysis

Definition

An investment practice based on the assumption that a stock's intricnsic or real value is determined by the company's future earnings.

fundamentalists consider (1)the financial strength of the company,(2)the type of industry the company is in (3) new-product development (4)theeconomic growth of the overall economy.

Term

Technical analysis

Definition

An investment practice based on the assumption that a stock's market value is determined by the forces of supply and demand in the stock market as a whole.

Technical analysts, sometimes called chartists, construct charts or use computer programs to plot past price movements and other market averages.

Term

The efficient market hypothesis (EMH)

Definition

An investment theory based on the assumption that stock price movements are purely random.

Term

Primary market

Definition

A market in which an investor purchases financial securities, via an investment bank or other representative, from the issuer of those securities

Term

Investment bank

Definition

A financial firm that assists corporations in raising funds, usually by helping to sell new security issues.

Term

Initial public offering (IPO)

Definition

Occurs when a corporation sells stock to the general public for the first time.

Term

Secondary market

Definition

A market for existing finacial securities that are currently traded among investors.

Term

Security exchange

Definition

A marketplace where member brokers who repersent investors meet to buy and sell securities

Term

Specialist

Definition

Buys or sells a particular stock in an effort to maintain an orderly market

Term

Over-the-counter (OTC) market

Definition

A network of dealers who buy and sell the stocks of corporations that are not listed on a securitites exchange.

Term

Nasdaq

Definition

An electronic marketplace for approximately 3200 different stocks.

Term

Account executive (stockbroker)

Definition

A licensed individual who buys or sells securities for clients.

Term

Market order

Definition

A request to buy or sell a stock at the current market value

Term

Limit order

Definition

A request to buy or sell a stock at a specified price

Term

Stop order

Definition

An order to sell a particular stock at the next available opportunity after its market price reaches a specified amount

Term

Speculators or traders

Definition

Individuals who routinely buy and then sell stocks within a short period of time

Term

Investors

Definition

Individuals who hold an investment for a long period of time. (at least a year or longer)

Term

Dollar cost averaging

Definition

A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals.

Term

Direct investment plan

Definition

A plan that allows stockholders to purchase stock directly from a corporation without having to use an account executive or a brokerage firm

Term

Dividend reinvestment plan

Definition

A plan that allows current stockholders the option to reinvest or use their cash dividends to purchase stock of the corporation.

Term

Day trader

Definition

An individual who buys and then later sells stocks and other securities in a very short period of time.

Term

Margin

Definition

A speculative technique whereby an investor borrows part of the money needed to buy a particular stock.

The current margin requriement is 50%. it means you may borrow up to half of the total stock purchase price.

Term

Selling short

Definition

Selling stock that has been borrowed from a brokerage firm and must be replaced at a later date.

When you sell shor, you sell today, knowing you must buy, or cover your short transaction, at a later date.

Term

Option

Definition

The right to buy or sell a stock at a predetermined price during a specified period of time.

Term

A call option

Definition

it is sold by a stockholder and gives the purchaser the right to buy 100 shares of a stock at a guaranteed price before a specified expiration date.

Term

A put option

Definition

It is the right to sell 100 shares of a stock at a guaranteed price before a specified expiration date.

Term

Corporate bond

Definition

A corporations' written pledge to repay a specified amount of money with interest.

Term

Face value

Definition

The dollar amount the bondholder will receive at the bond's maturity.

Term

Maturity date

Definition

For a corporate bond, the date on which the corporation is to repay the borrowed money

Term

Bond indenture

Definition

A legal document that details all of the conditions relating to a bond issue

Term

Trustee

Definition

A financially independent firm that acts as the bondholders' representative. Usually the trustee is a commercial bank or some other financial institution.

Term

Debenture

Definition

A bond that is backed only by the reputation of the issuing corporation. if the corporation fails to make either interest payments or repayment at maturity, debenture bondholders become general creditors, much like the firm's suppliers.

Term

Mortgage bond ( secured bond)

Definition

A corporate bond secured by various assets of the issuing firm

Term

Convertible bond

Definition

A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock.

Term

Subordinated debenture

Definition

An unsecured bond that gives bondholder a claim secondary to that of other designated bondholders with respect to interest payments, repayment, and assets.

Investors who purchase subordinated debentures usually enjory higher interest rates than other bondholders because of the increased risk associated with this type of bond.

Term

three advantages by issuing convertible bonds

Definition

the interest rate on a convertible bond is often 1 to 2% lower than that on traditional bonds.

the conversion feature attracts investors who are interested in the speculative gain that conversion to common stock may provide.

if the bondholder converts to common stock, the corporation no longer has to redeem the bond at maturity

Term

Call feature

Definition

A feature that allows the corporation to call in or buy outstanding bonds from current bondholders before the maturity date.

Term

Sinking fund

Definition

A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue.

Term

Serial bonds

Definition

Bonds of a single issue that mature on different dates.

Term

Investors purchase corporate bonds for three reasons

Definition

interst income

possible increase in value

repayment at maturity

Term

Registered bond

Definition

A bond that is registered in the owner's name by the issuing company

Term

Bearer bond

Definition

A bond that is not registered in the investor's name

Term

Zero-coupon bond

Definition

A bond that is sold at a price far below its face value, makes no annual or semiannual interest payments, and is redeemed for its face value at maturity.

Be aware two factors (1) even though all of the interest on these bonds is paid at maturity, the IRS requires you to report interest each year-that is, as you earn it, not when you actually receive it. (2)zero-coupon bonds are more volatile than other types of bonds.

Term

Approximate market value

Definition

Approximate market value

= Dollar amount of annual interest

Comparable interest rate

Term

Bond ladder

Definition

A strategy where investors divide their investment dollars among bonds that mature at regual intervals in order to balance risk and return.

To start your bond ladder, you purchase different bonds with maturities spread out over a number of years. The short-term bonds provide a high degree of stability because the bonds are not very sensitive to changing interest rates.

Intertest paid on U.S government securities is taxable for federal income tax purpose but is exempt from state and local taxation

Term

Treasury bill (T-bill)

Definition

sold in a minimum unit os $ 100 with additional increments of $ 100 above the minimum. currently only sells T-bills with 4 weeks,13 weeks, 26 weeks and 52 weeks maturities.

T-bills are discounted securities, and the actual purchase price you pay is less than the maturity value of the T-bill.

Term

Current yield for a T - bill

Definition

Current yield for a T-bill

= Discount amount

Purchase price

Term

Treasury note (T-note)

Definition

it is issued in $ 100 units with a maturity of more than 1 year but not more than 10 years. Typical maturities are 2, 5, and 10 years. Interest for treasury notes is paid every six months.

Term

Treasury bond

Definition

it is issued in minimum units of $100 that have a 30 uear maturity. interest is paid every six months.

Term

Treasury inflation-protected securities (TIPS)

Definition

it is sold in minimum units of $ 100 with additonal increments of $ 100 above the minumum. is is sold with 5, 10, or 20 year maturities. the principal of TIPS securities increases with inflation and decreases with deflation, as measured by the consumer price index. When TIPS mature, you are paid the adjusted principal or original principal, whichever is greater. Interest paid twice a year at a fixed rate.

Term

Municipal bond (Muni)

Definition

A debt security issued by a state or local government. The interest on municipal bonds may be exempt from federal taxes. Municipal bonds exempt from federal taxation are generally exempt from state and local taxes only in the state where they are issued.

A captial gain that results when you sell a municipal bond before mayturity and at a profit may be taxable just like captial gains.

Term

General obligation bond

Definition

A bond backed by the full faith, credit, and unlimited taxing power of the government that issued it.

Term

Revenue bond

Definition

A bond that is repaid from the income generated by the project it is designed to finance.

Term

Taxable equivalent yield

Definition

Taxable equivalent yield = Tax exempt yield

1.0 - your tax rate

Term

Clean price

Definition

It represents the price of a bond with no accrued or earned interest.

Term

Dirty price of a bond

Definition

It represents the price of the bond plus accrued interest earned by thebond owner since the last interest payment date. The dirty price is different from the clean price because bond owners earn interest for every day that they own a bond issue.

Term

the bid price

Definition

it is the price a dealer is willing to pay for a governemtn security. The bid price represents the amount that a seller could receive for a government bond.

Term

Asked price

Definition

it represents the price at which a dealer is willing to sell to a government security. The asked price represents the amount for which a buyer could purchase the security.

Term

Yield

Definition

The rat of return earned by an investor who holds a bond for a stated period of time

Term

Current yield

Definition

Determined by dividing the annual dollar amount of income generated by an investment by the investment's current market value.

Current yield on a corporate bond

= Annual income amount

Current market value

The higher the current yield, the better.

Term

Time interest earned

Definition

Time interest earned

= Operating income before interest and taxes

Interest expense

Higher number is better.

Term

yield to maturity

Definition

It takes into account the relationship among a bond's maturity value, the time to maturity, the current price, and the dollar amount of interest.

Yield to maturity

FaceValue-MktValue

Dollar amount of annual interest+ Number of periods

= Market value + face value

2

The higher the yield to maturity, the better.

Term

Mutual fund

Definition

An investment company that pools the money of many investors-its sharholders-to invest in a variety of securities.

Term

The major reasons investor purchase mutual funds

Definition

Professional management

diversification

Term

A closed -end fund

Definition

A mutual fund whose shares are issued by an investment company only when the fund is orgainzed.

Term

Exchange-traded fund (ETF)

Definition

A fund that invests in the stocks or other securities contained in a specific stock or securities index.

Term

Open-end fund

Definition

A mutual fund whose shares are issued and redeemed by the investment company at the request of investors.

Term

Net asset value

Definition

The current market value of the securities contained in the mutual fund's portfolio minus the nutual fund's liabilities divided by the number of shares outstanding.

Net asset value=Value of the fund's portfolio-Liabilities

Number of shares outstanding

Term

Load fund ( A fund)

Definition

A mutual fund in which investors pay a commisiion ( as high as 8 1/2 percent) every time they purchase shares.

Term

No-load fund

Definition

A mutual fund in which the individual investor pays no sales charge

Term

Contingent deferred sales load (back-end load or B fund)

Definition

A 1 to 5 percent charge that sharholders pay when they withdraw their investment from a mutual fund

Term

12 b-1 fee

Definition

A fee that an investment company levies to defray the costs of advertising and marketing a mutual fund and commissions paid to a broker who sold you shares in the mutual fund.

It calculated on the value of a fund's assets and cannot exceed 1%of the fund's assets per year. for no-load fund, it must not exceed 0.25%

Term

Expense ratio

Definition

All the different managemt fees,, 12b-1 fees, if any, and additional fund operating costs for a specific mutual fund. You need to choos a mutual fund with an expense ratio of 1% or less.

Term

Family of funds

Definition

A group of mutual funds managed by one investment company. Each fund within the family has a different financial objective.

Term

How to read the mutual funds sections in the footnotes

Definition

"p" means a 12b-1 distribution fee is charged

"r" means a redemption charge may be made

"t" means both the p & r footnotes apply

"s" means the fund has had a stock spolt or paid a dividend

Term

Income dividends

Definition

The earnings a fund pays to shareholders from its dividend and interest income

Term

Capital gain distributions

Definition

the payments made to a fund's shareholders that result from the sale of securities in the fund's portfolio.

Term

Advantages of investing in mutual funds

Definition

Diversification

Professional management

Ease of buying and selling shares

Multiple withdrawal options

Distribution or reinvestment of income and capital gain distributions

Switching privileges within the same fund family

Services that include toll-free telephone numbers, complete recors of all transactions, and savings and checking accounts

Term

Disadvantages of investing in mutual funds

Definition

Purchase/withdrawal costs

Ongoing management fees and 12b-1 fees

Poor performance that may not match the standard & poor's 500 stock index or some other index

Inability to control when capital gain distritutions occur and cmoplicated ta-reporting issues

Potential market risk associated with all investments

Some sales personner are aggressive and/or un ethical

Term

Turnover ratio

Definition

The percentage of a fund's holdings that have changed or "been replaced" during a 12-month period. It is a measure of a fund's trading activity.

Term

Four options to purchase shares in an open-end mutual fund from an investment company

Definition

regual account transactions

voluntary saving plans-the minimum purchase ranges from $25to 100 for each purchase after the initial investment

contractual savings plans- it requires you to make regular purchases over a specified period of time, usually 10-20 yrs. it's referred to as front-end load palns because alomost all of the commisiions are paid in the first few years of the contract period.

reinvestment plans-A service provided by an investment company in which income dividends and capital gain distributions are automatically reinvested to purchase additional shares of the fund

Term

Direct investment

Definition

Investment in which the investor holds legal title to property.

It includes single-family dwellings, duplexes, apartments, land, and commercial property

Term

Indirect investment

Definition

Investment in which a trustee holds legal title to property on behalf of the investors.